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Ah, For the Ignorance that Is Ignorant of Itself, by Peter Dorman: Catherine Rampell quotes Daniel Webster, who sponsored a bill to eliminate the American Community Survey, which was passed by the full House of Representatives: “...in the end this is not a scientific survey. It’s a random survey.”
Posted by Mark Thoma on Sunday, May 20, 2012 at 09:34 AM in Economics |
Posted by Mark Thoma on Sunday, May 20, 2012 at 12:12 AM in Economics, Links |
Miles Corak explains one of the ways in which inequality is transmitted between generations:
A little secret Denmark shares with Canada about social mobility that Americans and Brits should know, by Miles Corak: ...Denmark has a little secret, one it shares with Canada, about how kids get jobs, and about how this determines life chances even in places with low inequality.
The Russell Sage Foundation has just published a collection of essays... This ... chapter I co-authored with two Danish researchers, Paul Bingley and Niels Westergård-Nielsen,... examines the degree to which sons end up working in the very same firm as their fathers, an aspect of social mobility that is directly related to equality of opportunity.
We find three remarkably similar outcomes in Canada and Denmark. ... First, the transmission of employers between fathers and sons is a common feature, with about 30% of young Danes and 40% of Canadians having at some point been employed with a firm that also employed their father. In large measure this is associated with the first jobs ... during their teen years, but for four to about six percent it also refers to their main job in adulthood. ...
Even if the transmission of employers across generations is in large measure about temporary employment as teens make the transition from school to work, it still represents a type of parental investment that may have longer-term consequences. Sons inheriting a job may be more likely to gain work experience, job tenure and associated general and firm-specific skills. They may also avoid unemployment, and can be imagined to gain a head start in establishing themselves in the labour market.
Our second major finding is that the transmission of employers between fathers and sons is greater, the greater the father’s earnings, and rising distinctly and sharply for top earners. ... In fact, if the father’s earnings placed him in the top 1%, the majority of sons—indeed almost 7 out of 10 in Canada—had worked for an employer at which the father had also worked (graph). ... This pattern holds up when the focus is on the career employer, the employer accounting for the majority of earnings in adulthood...
Our third finding is that the transmission of employers between fathers and sons has implications for earnings. The degree to which a son’s earnings are related to his father’s is very similar in Canada and Denmark... In both countries sons born to fathers in the bottom 25% of the earnings distribution have about a 30% chance of ending up in the bottom 25% as adults, and about a 15% chance of rising to the top 25%.
These are enviable rates when compared to other countries like the United States or the United Kingdom. ... But mobility out of the bottom has little to do with inheriting an employer from the father, while the preservation of high income status is distinctly related to this tendency. ...
My co-authors and I feel that this research raises the importance of recognizing that child outcomes are related not just to the quality of the early years, but also to the structure of labour markets, and the resources parents have—though information, networks, or direct control of the hiring process—to influence the final transition children make in becoming self-sufficient and successful adults.
Most importantly it also makes us wonder what is happening in other countries. If the inheritance of employers is this strong in a country with a great deal of equality like Denmark, and if it is even stronger in Canada, where inequality is somewhat greater, then how do labour markets function in the United Kingdom and the United States where inequality is even greater and generational mobility lower? ...
I was determined not to get stuck working in the tractor stores that captured so many other members of my family -- my first jobs beyond summer employment were waiting on farmers at tractor parts counters in high school and college and my father had a direct hand in my getting the jobs. I somehow managed to beat the odds, but it would have been very easy to simply follow in the same footsteps, and I may have had little choice if education at the state universities in California hadn't been so cheap (without tuition of $100 per semester, there's a good chance I'd still be spending my days at a John Deere dealership -- I know how many other people there are like me, and it's hard to watch opportunity implode along with the California State University system.
Posted by Mark Thoma on Saturday, May 19, 2012 at 11:12 AM in Economics, Income Distribution |
I wrote this the other day and then forgot to post it at CBS and/or here:
Information in the minutes from the April 24-25 meeting of the Federal Reserve's policymaking committee released last week led many observers to conclude that monetary easing was more likely than we thought. The confirmation of Jeremy Stein and Jerome Powell as Federal Reserve governors on Thursday did little to alter that view since most believed these appointments would do little to change the balance of power in monetary policy meetings. However, the real news from these two events isn't about potential changes in the policy outlook, it's that current policy is now even more entrenched than before.
The key reason that many analysts changed their policy outlook was language in the minutes from the last meeting of the Federal Open Market Committee, in particular this phrase: "Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough." However, the fact that "several members" of the committee favored more easing if the economy deteriorates "enough" was well known before the minutes were released. The speeches given by presidents of the regional Fed banks, members of the Board of Governors, and most importantly Chairman Bernanke himself, made this clear. Thus, the minutes confirm the commitment to existing policy -- stay the course for now unless conditions change dramatically in either direction -- rather than signaling a deviation from it.
The appointment of Jeremy Stein and Jerome Powell as Federal Reserve governors, the first time all seven positions on the Board of Governors have been filled since April 2006, also gives more gravity to existing policy. Both appointees are experts in the operation of financial markets, expertise that is needed at the Board. But they are not experts on the use of monetary policy tools such as quantitative easing to stabilize the economy, and are thus likely to defer to majority opinion on these matters, Chairman Bernanke's opinion in particular. This gives majority opinion more weight making it harder to change.
There is a final factor that will tend to lock present policy in place, the upcoming election. The Fed is historically reluctant to do anything in election years that appears to favor one party over the other. Thus, big policy moves are unlikely unless there is a clear justification for them. A substantial deterioration in the economy would provide the needed justification, but the hurdle for what constitutes "substantial" is larger in a presidential election year.
Together, all of these factors point to more persistence in current policy. If the economy takes a large unexpected downward turn, or if inflation begins to rise to worrisome levels policy could change, but for now present policy is firmly anchored in place.
Posted by Mark Thoma on Saturday, May 19, 2012 at 09:47 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Saturday, May 19, 2012 at 12:21 AM in Economics, Links |
Chrystia Freeland highlights research showing that reduced discrimination over the last 50 years gave the economy a substantial boost -- increased fairness gave us increased efficiency. Unfortunately, however, it appears that new barriers may be emerging:
Equal rights and the U.S. economy, by Chrystia Freeland: Are equal rights good for the economy? ... A draft paper by four U.S. economists makes the strong empirical case... Fairness, they contend, has made the economy more productive. Chang-Tai Hsieh, Erik Hurst, Charles Jones and Peter Klenow argue that as much as 20 percent of the growth in productivity in the United States over the past 50 years can be attributed to expanded opportunities for women and blacks. ...
Few women or blacks would describe the United States today as a perfectly color- or gender-neutral economy. But ... female and black workers have felt the change directly in their paychecks. According to the paper, the reduction in frictions since 1960 increased real wages for white women 39 percent; those of black women, who suffered double discrimination and therefore got a double boost, 57 percent; and those of black men 44 percent.
But while the economy as a whole benefited, there was one group that lost out. The paper calculates that the “reduced friction” for women and blacks meant that the real wages of white men were 4.3 percent lower than they would have been without the increased competition. That result explains a political reality that we often don’t like to admit: Gains for women and blacks have come at a price for white men, and that is surely why some of them still resist the rights revolution. ...
The story in their draft paper on women and blacks is positive... But the four economists suspect that for one category of Americans, the poor, the external barriers to professional success have actually increased. ...
Hurst made sure I understood that this final point was just a hypothesis. The economists plan to run it through their model over the next few months and report on their results later this year. But if their theory pans out, their work will tell a story about America over the past 50 years that many of us intuitively will feel to be true – a country that discriminates less and less on the basis of gender, race and now sexual orientation, but where the class divide is becoming so stark as to constitute a new form of discrimination.
Increased inequality and the associated decrease in mobility are usually presented as as issues of fairness, but when barriers prevent people from realizing their potential that has implications for efficiency as well. It hurts both individuals and the economy as a whole when some groups of people face "external barriers."
Posted by Mark Thoma on Friday, May 18, 2012 at 10:05 AM in Economics, Equity, Income Distribution |
Can the euro be saved?:
Apocalypse Fairly Soon, by Paul Krugman, Commentary, NY Times: Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams ... with stunning speed, in a matter of months... And the costs — both economic and, arguably even more important, political — could be huge. ...
Greece is, for the moment, the focal point. Voters who are understandably angry at policies that have produced 22 percent unemployment — more than 50 percent among the young — turned on the parties enforcing those policies. And ... the result ... has been rising power for extremists. ... Greece won’t, can’t pursue the policies that Germany and the European Central Bank are demanding.
So now what? Right now, Greece is experiencing ... a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.
This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.
Yet financing isn’t enough. Italy and, in particular, Spain must be offered hope —... some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to ... accept and indeed encourage several years of 3 percent or 4 percent inflation...
Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. ... So will Europe finally rise to the occasion? Let’s hope so... For the biggest costs of European policy failure would probably be political.
Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists.
All of us, then, have a big stake in European success... The whole world is waiting to see whether they’re up to the task.
Posted by Mark Thoma on Friday, May 18, 2012 at 12:33 AM in Economics, International Finance, Politics |
Closer to Colliding, by Tim Duy: Each passing day brings the runaways trains closer to collision.
The European strategy to scare the Greek people into voting for pro-austerity parties was always risky. My tendency is to think it will drive voters in the other direction, this is especially the case if voters come to believe they hold the real leverage. And that is exactly the strategy that is emerging. From the Wall Street Journal:
The head of Greece's radical left party says there is little chance Europe will cut off funding to the country and if it does, Greece will repudiate its debts, throwing down a gauntlet that could increase tensions between Greece's recalcitrant politicians and frustrated European creditors...
..."Our first choice is to convince our European partners that, in their own interest, financing must not be stopped," Mr. Tsipras said in an interview with The Wall Street Journal. "If we can't convince them—because we don't have the intention to take unilateral action—but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."
Europe and the Greece are locked in a battle of mutually assured financial destruction. Nor can European leaders afford to take Tsipras' threats lightly:
According to recent opinion polls, Mr. Tsipras' party is poised to win the most votes in repeat elections next month, bettering its surprise second-place finish in an inconclusive May 6 vote that left no party or coalition with enough seats in Parliament to form a government. With Mr. Tsipras poised to win pole position in the coming vote, it raises the risk that Greece will soon face a showdown with its European creditors over the contentious austerity program that Athens must implement in order to receive fresh aid.
If Europe caves and gives in to Greek demands, however, a new set of challenges to the austerity agenda will arise. How long would it be before the people of Spain or Italy or Portugal or Ireland realize that they too have much more leverage than they ever imagined. Can the Troika cave to Greece while remaining credible with other troubled economies? I doubt it - which I think increases the risk that the core of Europe will believe it necessary to create a moral hazard example out of Greece.
Of course, this worked so well with Lehman Brothers. We will just foget about that little detail for the moment.
Posted by Mark Thoma on Friday, May 18, 2012 at 12:24 AM in Economics, Fed Watch, International Finance, Monetary Policy |
Posted by Mark Thoma on Friday, May 18, 2012 at 12:06 AM in Economics, Links |
David Altig argues that flexible inflation targeting "is far from dead":
Is inflation targeting really dead?, by David Altig: Harvard's Jeffrey Frankel (hat tip, Mark Thoma) is the latest econ-blogger to cast an admiring gaze in the direction of nominal gross domestic product (GDP) targeting. Frankel's post is titled "The Death of Inflation Targeting," and the demise apparently includes the notion of "flexible targeting." The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting. Frankel, nonetheless, makes a case for nominal GDP targeting:
"One candidate to succeed IT [inflation targeting] as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980's, since it did not share the latter's vulnerability to so-called velocity shocks.
"Nominal GDP targeting was not adopted then, but now it is back. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand—the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway."
That's certainly true, but a nominal GDP target is consistent with a stable inflation or price-level objective only if potential GDP growth is itself stable. Perhaps the argument is that plausible variations in potential GDP are not large enough or persistent enough to be of much concern. But that notion just begs the core question of whether the current output gap is big or small. At least for me, uncertainty about where GDP is relative to its potential remains the key to whether policy should be more or less aggressive.
In another recent blog item (also with a pointer from Mark Thoma), Simon Wren-Lewis offers the opinion that acknowledging uncertainty about size of the output gap actually argues in favor of being "less cautious" about taking an aggressive policy course. The basic idea is familiar. It is a simple matter to raise rates should the Fed overestimate the magnitude of the output gap. But with the short-term policy rates already at zero, it is not so easy to go in the opposite direction should we underestimate the gap.
No argument there. As I pointed out in a May 3 macroblog item, Atlanta Fed President Dennis Lockhart has said the same thing. But, as I argued in that post, this point of view is only half the story. Though I agree that the costs are asymmetric with respect to the downside with respect to the FOMC's employment and growth mandate, they look to me to be asymmetric to the upside with respect to the price stability mandate. And I view with some suspicion the claim that we know how to easily manage policy that turns out to be too aggressive after the fact.
My issues are not merely academic. In an important paper published a decade ago, Anasthsios Orphanides made this assertion:
"Despite the best of intentions, the activist management of the economy during the 1960s and 1970s did not deliver the desired macroeconomic outcomes. Following a brief period of success in achieving reasonable price stability with full employment, starting with the end of 1965 and continuing through the 1970s, the small upward drift in prices that so concerned Burns several years earlier gave way to the Great Inﬂation. Amazingly, during much of this period, specifically from February 1970 to January 1977, Arthur Burns, who so opposed policies fostering inﬂation, served as Chairman of the Federal Reserve. How then is this macroeconomic policy failure to be explained? And how can such failures be avoided in the future?...
"The likely policy lapse leading to the Great Inﬂation …can be simply identified. It was due to the overconfidence with which policymakers believed they could ascertain in real-time the current state of the economy relative to its potential. The willingness to recognize the limitations of our knowledge and lower our stabilization objectives accordingly would be essential if we are to avert such policy disasters in the future."
With this historical observation in hand, it seems a short leap to turn Wren-Lewis's thought experiment on its head. Arguably, the last several years have demonstrated that nonconventional policy actions have been quite successful at short-circuiting the disinflationary spirals that pose the central downside risk when interest rates are near zero. (If you can tolerate a little math, a good exposition of both theory and evidence is provided by Roger Farmer.)
On the opposite side of the ledger, we know little about the conditions that would cause the Fed to lose credibility with respect to its commitment to its inflation goals, and very little about the triggers that would cause inflation expectations to become unanchored. Thus, I think it not difficult to construct a plausible argument about the risks of being wrong about the output gap that is exact opposite of the Wren-Lewis conclusion.
I end up about where I did in my previous post. Flexible inflation targeting, implemented in such a way that the 2 percent long-run inflation target rate exerts an observable gravitational pull over the medium term, feels about right to me. Despite what Frankel seems to believe, I think that idea is far from dead.
Posted by Mark Thoma on Thursday, May 17, 2012 at 02:49 PM in Economics, Monetary Policy |
This was unexpected:
Federal Reserve Bank of St. Louis President James Bullard said Thursday that banks deemed “too big to fail” should be split up. “We do not need these companies to be as big as they are,” Bullard said. His remarks come a week after J.P. Morgan Chase & Co. disclosed a $2 billion trading loss. “We should say we want smaller institutions so that they can safely fail if they need to fail,” he said...
I don't like excessively large banks because of the economic and political power that they have. For me, that is the main reason to break them up (especially since I have yet to see convincing evidence that we need banks this large in order to exploit economies of scope and scale).
But when it comes to stabilizing the financial system, it's not so clear. If we break a big bank into smaller banks, and a systemic shock hits that threatens to cause all of the small banks to fail, it may be harder to shore up the system and prevent a domino-style collapse than it would be if there was just one large bank to deal with. The Great Depression, for example, was characterized by the failure of many, many smaller banks rather than the toppling of a few large, systemically important institutions.
But that is not an insurmountable problem. A coordinated policy across the smaller banks can be equivalent to policy at a single, large institution, and we simply have to be ready to implement the appropriate policies when trouble threatens. So although it may be somewhat easier to deal with one bank rather than, say, 10 or 20, that's not a reason to allow banks to be so large. So I'm glad to see Bullard's comments.
However, Tim Duy is less pleased with his views on inflation:
Don't Let the Data Get in the Way of Your Story, by Tim Duy: St. Louis Federal Reserve President James Bullard:
The main risk lies in potentially overcommitting to the ultra-easy monetary policy, reigniting the global inflation debacle of the 1970s.
Ten-year inflation expectations via the Cleveland Federal Reserve:
Bullard is obviously a Serious Central Banker, because Serious Central Bankers only see inflation everywhere.
Undue fear of inflation generally among FOMC memebers is holding policy back. There are those who favor more aggressive policy, but not enough to make a difference.
Posted by Mark Thoma on Thursday, May 17, 2012 at 11:21 AM in Economics, Financial System, Inflation, Market Failure, Monetary Policy |
Give all the uncertainties about Europe, and additional worries about other things such as oil prices, if we could buy insurance against future economic problems, now would be a good time to do it.
Oh wait, we can. That insurance is called monetary and fiscal policy. Like all insurance it does come with some cost, and yes -- again like all insurance -- there's a chance we won't need it. But if we bet against the car wreck and it happens anyway -- and the odds of collateral damage from a wreck in Europe are high right now -- we'll be sorry.
Keep in mind, too, that some forms of insurance don't have to be very costly. In fact, in some cases the benefits could outweigh the costs even if Europe, oil prices, etc. do not turn out to be problems. What I have in mind is infrastructure spending. Infrastructure spending gives us the extra demand we need to provide insurance against a shock to demand from Europe, etc. And we could use the extra demand in any case given the high level of unemployment right now, so there are benefits even if the insurance is not needed. Thus, there are benefits on the demand side no mater what happens.
But infrastructure spending also has important supply side effects. Improved infrastructure would enhance future growth (and the additional jobs the spending would generate would help to prevent permanent losses to the economy associated with long-term unemployment). The higher growth alone yields benefits to the economy that exceed the cost of the investment (costs that are extraordinarily low due to rock bottom interest rates), and when the deamnd side/insurance benefits are added in, it seems to be a no-brainer. Unfortunatley, there are far too many "no brainers' in Congress right now to allow such sensible policy to go forward.
Posted by Mark Thoma on Thursday, May 17, 2012 at 10:04 AM in Economics, Fiscal Policy, Monetary Policy |
Europe Overnight, by Tim Duy: European policymakers are trying to sway the vote in Greece. From the Financial Times:
Senior European leaders are attempting to turn Greece’s repeat national election next month into a referendum on the country’s membership of the euro, a high-stakes political gamble that officials believe can win back voters disillusioned by the tough bailout conditions but eager to stay in the single currency.
José Manuel Barroso, president of the European Commission, made the choice clear on Wednesday, telling Greek voters the €174bn rescue programme would not be changed and that remaining in the eurozone was now in their hands...
...“The next election is going to be a sort of referendum election,” said one eurozone finance minister. “We are going to convey very clearly to the Greek people that if there is no stable government to implement the conditions of the programme then we are going to have difficulties and are going to have to adopt plan B.”
I thought the last election was supposed to be a referendum on Greece's commitment to the Euro. European policymakers fail to understand that they have provided the Greek people no way out - they are damned if they do, damned if they don't. Even if the Greeks overwhelming want to remain in the Euro, the austerity program guarantees ongoing recession, and the Greek people are being asked to commit to a program that is effectively already overtaken by events. The deteriorating fiscal situation seems to guarantee a new program will be necessary in the months if not weeks ahead. Would the rest of Europe agree to another bailout, regardless of whatever new conditions were required to get another deal done? If the rest of Europe really wants Greece to stay in the Euro, I think it can only work with a program of bilateral transfers to Greece in exchange for radical, rapid restructuring of the economy. Carrot, meet stick.
The rest of Europe might not think this is fair, but let's be honest - ultimately, it wasn't fair to bring Greece into the Euro in the first place.
On the issue of internal fiscal transfers, British Prime Minister David Cameron is joining the chorus of policymakers calling on Continental leaders to understand the extent of their problem:
“Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing and supportive monetary policy across the eurozone or we are in uncharted territory which carries huge risks for everyone.”
That pretty much summarizes the situation. The institutional structure, the fiscal plumbing, simply isn't present in the Eurozone to adequately adjust for asymmetric shocks. End of story. Either get that structure in place or accept that the project is a failure. Can Europe make such a transition fast enough? Yes - with German leadership to offer a mix bilateral transfers, Eurobonds, and ECB commitment to stand as lender of last resort to all the region as a whole. Economically possible and politically possible, however, are two different things.
Finally, the ECB has reverted to its usual helpful self. From Bloomberg:
The European Central Bank is conducting a comprehensive review of all its policy tools and has no immediate plans to increase stimulus even as market tensions mount, two euro-area officials said.
The review, mandated by the central bank’s six-member Executive Board, intends to assess the effectiveness of its measures, including the bond-buying program and long-term refinancing operations, and is scheduled to be completed in June or July, said the officials, who spoke on condition of anonymity because the deliberations are private. A third official said the ECB may not consider taking any further policy action until July, and that the bank sees current market tensions as a way of focusing politicians’ minds on reform efforts.
Way to stay ahead of the central banking curve! Maybe if ECB members just close their eyes, tap their heels together, and softly whisper "there's no place like home," the crisis will come to a sudden end.
Hey, it works in the movies.
Posted by Mark Thoma on Thursday, May 17, 2012 at 12:24 AM in Economics, Fed Watch, International Finance |
Posted by Mark Thoma on Thursday, May 17, 2012 at 12:06 AM in Economics, Links |
Jeffrey Frankel says inflation targeting is falling out of favor, but it's not clear what will replace it:
The Death of Inflation Targeting, by Jeffrey Frankel, Commentary, Project Syndicate: It is with regret that we announce the death of inflation targeting. The monetary-policy regime, known as IT to friends, evidently passed away in September 2008. The lack of an official announcement until now attests to the esteem in which it was held, its usefulness as an ornament of credibility for central banks, and fears that there might be no good candidates to succeed it as the preferred anchor for monetary policy. ...
Regardless of the form it took, IT began to receive some heavy blows a few years ago... Perhaps the biggest setback hit in September 2008, when it became clear that central banks that had been relying on IT had not paid enough attention to asset-price bubbles. ... [A]nother major setback was inappropriate responses to supply shocks and terms-of-trade shocks. ... CPI targeting ... tells the central bank to tighten policy in response to an increase in the world price of imported commodities – exactly the opposite of accommodating the adverse shift in the terms of trade. ...
One candidate to succeed IT as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980’s, since it did not share the latter’s vulnerability to so-called velocity shocks.
Nominal GDP targeting ..., unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand – the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway.
A dark-horse candidate is product-price targeting, which would focus on stabilizing an index of producer prices... Unlike IT, it would not dictate a perverse response to terms-of-trade shocks.
Supporters of both nominal GDP targeting and product-price targeting claim that IT sometimes gave the public the misleading impression that it would stabilize the cost of living, even in the face of supply shocks or terms-of trade-shocks, over which it had no control. ...
Posted by Mark Thoma on Wednesday, May 16, 2012 at 08:01 AM in Economics, Monetary Policy |
FOMC Minutes, by Tim Duy: The FOMC minutes are released tomorrow. Calculated Risk gives us the Goldman Sachs preview:
We expect that the April FOMC minutes ... will include a discussion of possible easing options. ... The first set of options center around the Fed's balance sheet, and we think that the discussion might include the benefits of mortgage purchases, the potential for more “twisting,” and the pros and cons of sterilized asset purchases.
I understand where this comes from - Operation Twist is coming to an end next month, and the two-day meeting in April seems like a natural chance to discuss future options. That said, I am drawn to the minimal interest in this topic in March:
The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.
Given the last FOMC statement, it doesn't look like the Fed's baseline outlook shifted much between then and the April meeting. And I don't see Federal Reserve Chairman Ben Bernanke's press conference or the most recent Fedspeak as being particularly supportive of additional action. Which leads me to believe that even if the Fed discussed some hypothetical easing options, they will downplay this as conditional on a marked deterioration in economic conditions. I don't think we are there yet. I just don't see much support for additional easing at this point, albeit plenty of support to not tighten either. That said, I would expect market participants to seize upon even the slightest hint of QE3 given the fragility that is currently driven by Europe.
Posted by Mark Thoma on Wednesday, May 16, 2012 at 01:08 AM in Economics, Fed Watch, Monetary Policy |
There was recently some discussion of "genoeconomics":
...the idea that genes had an important role to play in decision-making was largely abandoned in the world of economics. But with the completion of the Human Genome Project in 2000, the first full sequence of a human being’s genetic code, people started wondering if perhaps it would be possible to push past broad heritability estimates ... and figure out what part of a person’s genome influenced what aspect of his behavior.
However, Cornell economist Daniel Benjamin argues that the ability of genetic factors to explain individual variation in economic and polilitical behavior is "likely to be very small" (genetic data "taken as a whole" may have some predictive power, but "molecular genetic data has essentially no predictive power"):
New evidence that many genes of small effect influence economic decisions and political attitudes, EurekAlert: Genetic factors explain some of the variation in a wide range of people's political attitudes and economic decisions – such as preferences toward environmental policy and financial risk taking – but most associations with specific genetic variants are likely to be very small, according to a new study led by Cornell University economics professor Daniel Benjamin.
The research team arrived at the conclusion after studying a sample of about 3,000 subjects with comprehensive genetic data and information on economic and political preferences. The researchers report their findings in "The Genetic Architecture of Economic and Political Preferences," published by the Proceedings of the National Academy of Sciences Online Early Edition, May 7, 2012.
The study showed that unrelated people who happen to be more similar genetically also have more similar attitudes and preferences. This finding suggests that genetic data - taken as a whole – could eventually be moderately predictive of economic and political preferences. The study also found evidence that the effects of individual genetic variants are tiny, and these variants are scattered across the genome. Given what is currently known, the molecular genetic data has essentially no predictive power for the 10 traits studied, which included preferences toward environmental policy, foreign affairs, financial risk and economic fairness.
This conclusion is at odds with dozens of previous papers that have reported large genetic associations with such traits, but the present study included ten times more participants than the previous studies.
"An implication of our findings is that most published associations with political and economic outcomes are probably false positives. These studies are implicitly based on the incorrect assumption that there are common genetic variants with large effects," said Benjamin. "If you want to find genetic variants that account for some of the differences between people in their economic and political behavior, you need samples an order of magnitude larger than those presently used," he added.
The research team concluded that it may be more productive in future research to focus on behaviors that are more closely linked to specific biological systems, such as nicotine addiction, obesity, and emotional reactivity, and are therefore likely to have stronger associations with specific genetic variants.
Posted by Mark Thoma on Wednesday, May 16, 2012 at 12:42 AM in Econometrics |
Greece is Running Out of Time, by Tim Duy: I have repeatedly described myself as a Euroskeptic. The current combination of politics and economics looks likely to at worst doom the Euro to failure, at best to commit the Continent to a deep and long-lasting recession. Moreover, the pace of deterioration in Greece, combined with an economic structure that seems completely at odds with much of the rest of Europe, seems to make a Grexit all but impossible.
That said, I am horrified at the ongoing willingness of European policymakers to still be playing chicken at this point. I assumed that my skepticism would ultimately be proved wrong as the European Central Bank would ultimately cave and effectively monetize national debt across the Eurozone, and that Germany would come to this conclusion as necessary to save the single currency that they have long-championed. That ultimately, the Eurozone would step up and take greater responsibility for this mess, understanding that while the Greeks have mismanaged their economy, they should never have been admitted to the Eurozone in the first place.
Instead, Europe situation is now akin to two or three trains running full-speed at one another, and by the time someone finally pulls on the brakes, it will be too late. By the time key actors step into action, irreparable damage will have been done
Consider that one of those trains, Greece, has no driver, nor will it until June 17 when fresh elections are held. Combine that with a deteriorating fiscal situation - believe it or not, it actually continues to get worse. From Bloomberg:
The level of funds in Greece’s state coffers has fallen below 1.5 billion euros ($1.9 billion), Imerisia reported, citing “reliable information.”
If the state doesn’t receive predicted revenue for the rest of this month, it will find it difficult to pay for social services, pensions and public-sector wages, the newspaper said.
This was confirmed by the outgoing leader:
Greece's outgoing Prime Minister Lucas Papademos has warned the country's political leaders the government may have difficulty in meeting its cash obligations as of the start of June, a Greek newspaper reported Monday.
In a note Papademos sent to Greek President Karolos Papoulias and discussed in Sunday's meetings between the president and party leaders on forming a coalition government, the prime minister said it is likely Greece will have significant difficulties in covering its cash payments in June, according to newspaper Ta Nea, citing unnamed sources from Papoulias' office
Now, further consider one of the proximate causes of the new fiscal shortfall:
Greece' s budget revenues have reportedly dropped by 10.2% in April compared to the same month in 2011, as daily Kathimerini reports quoting provisional figures the Finance Ministry is studying. The election period did nothing to help state receipts as the tax collection and monitoring mechanism traditionally relaxes ahead of polls, and did so again this year despite the crisis.
It has been said before, but is worth saying again - how did this economy pass the bar to Euro membership in the first place? If officially sanctioned tax avoidance remains in effect, and we have another month until the new elections, I can't imagine that the fiscal picture is going to do anything but go from bad to worse. Or from worse to as worse as it can get.
Given the deteriorating fiscal position, Greece will eventually need a larger bailout if it is to stay in the Euro. Simply put, if they can't pay their bills with Euros, they will need to issue their own currency. Deep in a piece on the failed efforts to collect property taxes via electricity bills, the FT brings us this from a "friendly trader":
When we talk about Greece “running out of money” in coming weeks/months, the combination of dire recession, plus non compliance in Revenue collection will speed the day that Civil Servants and suppliers are paid in IOU’s or “New Drachma” in the absence of any funding from the EU/IMF…
Once IOU's start circulating, the clock will start ticking. Either they get replaced soon with actual Euros, or they start trading as currency. In other words, time is growing very, very short to find a solution that keeps Greece in the Eurozone.
Meanwhile, is the final run on Greece's banks underway? From the Wall Street Journal:
Greek depositors withdrew €700 million ($898 million) from local banks Monday, the country's president said, as he warned that the situation facing Greece's lenders was very difficult.
In a transcript of remarks by President Karolos Papoulias to Greek political leaders that was released Tuesday, Mr. Papoulias said that withdrawals plus buy orders received by Greek banks for German bunds totalled some 800 million.
A bank run in the absence of a functioning government. Is there anyone ready to push the button on a bank holiday with capital controls? Or is this about to devolve into a free-for-all flight of capital?
Meanwhile, Germany and France are holding to the official line. From the FT:
“We want Greece to stay in the euro,” Ms Merkel said. “We know that the majority of people in Greece see that.”
The Greek government had also agreed on a rescue programme with the IMF and the EU after lengthy negotiations, she said. “I believe that memorandum must be respected.”
This ignores the small point that the last bailout was certain to fail from the start. The message remains that no one but Greece is making the decision to leave the Euro:
“We have to respect that there will be new elections in Greece,” she added. “We will make it clear that we want Greece to remain in the eurozone, and that is what the citizens are voting on.”
But out comes the unspecified carrot:
That meant fulfilling the commitments in the EU and IMF programme, she said, but added: “We will also give proposals to Greece to encourage growth.”
Mr Hollande went further, saying that “I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity, so that there is a return to growth in Greece.”More carrot with stick would have been helpful two years ago. Now it is looking like too little, too late. And what kind of measures are these? Direct bilateral transfers from Germany, which would be helpful? Or more loans to add to those that Greece can not already afford?
In other news, in the wake of its two LTRO operations, the ECB is back to neglecting its role as lender of last resort. As a consequence, Spanish yields are now solidly back above 6%, with Italian yields in close pursuit. Apparently, investors are not convinced that the supposed firewalls are sufficient to control contagion. European policymakers have fallen short of the mark. Again.
Bottom Line: I don't see how European policymakers can be anything but terrified that this whole experiment is unraveling at a frightening pace. Yet they keep barreling ahead on this disastrous path, ensuring that things continue to get worse before they get better.
Update: Three more from Tim Duy:
Continue reading "Fed Watch: Greece is Running Out of Time" »
Posted by Mark Thoma on Wednesday, May 16, 2012 at 12:33 AM
Here's the third part (German version) of an interview of Jamie Galbraith conducted a few weeks ago by Roger Strassburg and Jens Berger of the German blog NachDenkSeiten (first part, second part). This is on the Euro crisis:
NDS: You've pretty much followed what's been happening in Europe in the past years, haven't you?
Galbraith: I have been.
NDS: You've seen what's been going on in Germany? I've sent you some stuff that may or may not have enhanced what you know.
Galbraith: Thanks to you I have some familiarity.
NDS: I think if you look at the euro crisis, the financial crisis, and the reaction from German policy-- because Germany's power – became the European answer to the Euro crisis. Do you think that if we look at inequality, is inequality rising due to reactions like the austerity policy, like the constitutional debt brake, which now comes in future and … the Stability Pact...
Galbraith: Well, what you're seeing already is divergence across Europe, and that's the basic mechanism of rising inequality – and again, what played out in the United States in the form of credit booms to sectors, and in some cases in housing to various parts of the country – that boom followed by a bust played out in Europe as credit booms to countries, so you see the rise and the fall of Ireland and Spain and so forth, and it's that divergence which is truly the major, the largest single stress in the euro zone right now. Obviously what you describe going on inside Germany is also important, but the German national community is still bound together with a great many stabilizing institutions that still exist, although they are – as in the United States...
NDS: ...very much weakened...
Galbraith: …they're weakened, but they are still strong compared to what happens across national lines. So you expect things to fracture along the weakest links, and that's clearly the national boundaries in Europe. What will happen as a result of that is that you'll have a re-management of populations. It's clear that anybody with a professional qualification and the ability to do so will exit Greece to large expatriate communities already in the United States and in Australia. People will go – and Europe has a long history of people emigrating from Portugal and Spain – and if pressed, they will do that again. So you're going to see that the failure to stabilize national economies in Europe is simply going to lead, in the long run, to the redistribution of its populations.
NDS: I know you did compare inequality in Europe with the United States in your book. Do you think it's really legitimate to compare Europe, though, to the United States? In general you don't move from one country to another very often, because learning a language, of course, you're not going to learn a language and then move somewhere else two years later.
Galbraith: But I assure you, people do in fact, and they will. But it doesn't matter – in any event, for a valid measure of inequality, it is not necessary that people physically move. The important thing is that Europe is a unified economic whole from the standpoint of, let's say, an enterprise making investment decisions or an investor making portfolio decisions. The absence of barriers to capital mobility is just as decisive in creating a unified entity as fluidity of labor movement. But the other thing is one should not exaggerate the extent to which people inside the United States move permanently from one part of the country to another – it's very common for professionals, but a very large part of the population lives where it started from.
NDS: I don't know if you'd just call it a strategy, or if it's just more of an ideology of competitiveness between countries – Germany even goes so far as to want to have competition between the states for investment.
Galbraith: One consequence of European integration, which was clearly foreseen from the beginning and is characteristic of all industrial systems as they move to larger scale is that activity concentrates in the most competitive spot, and it's not just industrial, it's also agricultural. You've actually had concentration of certain agricultural activities in north Europe, which would hardly be thought to be ideal for that, but it happens. And it was foreseen that this would require compensating investments in the European periphery, but those investments haven't been close to being of an adequate scale. The same exact thing was true in the United States. You had, as the country developed on a continental level, industrial activity concentrated the North, Northeast and the Midwest. What ultimately happened to offset that was the New Deal. And the New Deal distributed economic activity – massive infrastructure projects in the South. We had, of course, the advantage of having a single country from the standpoint of distributing military expenditures, which is very important in the State of Texas, very important in other parts of the South. And we had a continental-level Social Security system that was established, which basically means that your base retirement is done at the national standard, not the local standard. So if you have a working life in Alabama, you're still getting at least the federal minimum Social Security payment. This has an enormous equalizing effect. People talk about the ways in which the United States is a very unequal country, but over the last 80 years, it has become radically less unequal geographically than it was before. It was a huge difference between the North and the South, which is no longer the case. Even forty years ago, when I was a kid, nobody, let's say, very few academics would consider making a move from New England to Texas. Because it was a oneway trip, you took a big cut in pay and you would never be able to come back. Now it's routine. The whole place has become substantially integrated, at least to a certain level. Now there are lots of inequalities and growing inequalities at the local level in the U.S., which is what people observe, but at the national level, it's much, much less than it used to be.
NDS: So do you think that a modern version of the Roosevelt New Deal would be the right answer for the euro crisis?
Continue reading "James Galbraith on the Euro Crisis" »
Posted by Mark Thoma on Wednesday, May 16, 2012 at 12:24 AM in Economics, International Finance |
Posted by Mark Thoma on Wednesday, May 16, 2012 at 12:06 AM in Economics, Links |
What Rule Should the Fed Follow?, by Bruce Bartlett, Commentary, NY Times: ...[T]he “Austrian” theory of the Great Depression ... says that even though there was no inflation during the 1920s, somehow or other inflation nevertheless caused the Great Depression. According to ... the Austrian school ... there was actually some sort of double-secret inflation because the money supply increased. They believe the same thing is happening right now.
When the Austrian theory was first put forward, conservative economists were keen to refute the widespread view that capitalism itself had caused the Great Depression and that the cure was full-bore socialism. The Austrians ... and others, were desperate to show that government was responsible...
Although the Austrian theory was initially viewed sympathetically by conservative economists..., it was abandoned when it became clear that there is no Austrian cure for depressions; the only course ... is to suck it up, let unemployment rise, and purge the mal-investment no matter how painful. Anything ... whatsoever the government does to ... counteract the economic downturn ... is inherently counterproductive...
In the 1960s, conservative economists adopted a different view. The government error was ... responding inappropriately to a garden-variety recession that began in August 1929. ... This “monetarist” theory of ... Milton Friedman and Anna Schwartz ... argued that if the Fed had acted as a lender of last resort, as it was created to do, it could have stopped the Great Depression in its tracks...
The monetarist theory was a far more attractive explanation for the Great Depression that also blamed government. It was largely adopted by conservatives except for a few Austrian holdouts... One attraction of the monetarist theory is that it allows for government action to respond to economic downturns, as opposed to the Austrian do-nothing policy.
When economic downturns arise, monetarists say the Fed should respond by expanding the money supply, not through an expansionary fiscal policy, as Keynesian economics recommends. ...
In the years since, however, the monetarist theory has lost favor among conservatives. They now assert, along with the Austrians, that the only “cure” for recessions is not to sow their seeds in the first place. Those seeds, all conservatives now agree, are sown primarily by the Fed, especially by holding interest rates “too low.”
Thus almost all conservatives, including many regional Federal Reserve bank presidents, believe the Fed should raise interest rates soon to prevent a reemergence of inflation, another boom and, inevitably, another bust that may be even worse than the one we have yet to emerge from. ...
The Austrian analysis of the Great Depression and the recent recession are wrong, I think. Unfortunately, that will not deter the conservatives.
David Glasner comments:
All in all, a worthwhile and enlightening discussion, but I couldn’t help wondering . . . whatever happened to Hawtrey and Cassel?
And Paul Krugman has argued the monetarist view has been tested in this recession (and in Japan), and failed.
...whatt Friedman ... argued was that the Fed could easily have prevented the Great Depression with policy activism; if only it had acted to prevent a big fall in broad monetary aggregates all would have been well. Since the big decline in M2 took place despite rising monetary base, however, this would have required that the Fed “print” lots of money.
This claim now looks wrong. Even big expansions in the monetary base, whether in Japan after 2000 or here after 2008, do little if the economy is up against the zero lower bound. The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested.
Beyond that, however, Friedman in his role as political advocate committed a serious sin; he consistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression.
And this debased and misleading version is what has filtered down to the likes of Ron Paul, who then use it to argue against the very activism Friedman was really advocating.
Bad Milton, bad.
Posted by Mark Thoma on Tuesday, May 15, 2012 at 08:34 AM in Economics, Methodology, Monetary Policy |
I am at the Atlanta Fed today (on a panel). I'll post as I can.
Posted by Mark Thoma on Tuesday, May 15, 2012 at 08:01 AM in Conferences, Economics |
(Though it won't post until later, I may as well try to do something while I sit in this airplane seat.)
Like Brad DeLong, before the recession started I could not have imagined that policymakers would fail to put the unemployed first and foremost in all policy decisions. I was sure the unemployed would come before inflation, before banks, before debt reduction and contrived fights over the debt ceiling. How could we possibly turn our backs on millions of struggling households, especially when doing so creates so many additional long-run problems for individual households and for the economy as a whole? Nothing else would be more important than putting people back to work, and we would, of course, come together and mobilize in a national war against high unemployment.
But I forgot something. With the decline in unions in recent decades, the working class has lost both economic and political power. And at the same time, those at the top end of the income scale have gained power both relatively and absolutely. So why would I have ever thought that the unemployed would come first when they have so little organized political power? Is it any surprise that policy has paid most attention to the issues that just happen to be the things those with the most political power care the most about? What was I thinking?
I suppose I was thinking that politicians were honorable, that money wouldn't trump principle. Silly me. In any case, the question is how to change the balance of power. We could get the money out of politics, but that will never be fully possible. Even with the best of effort, loopholes, bypasses, and the like will always be sought out, found, and exploited too circumvent the rules. That doesn't mean we shouldn't try -- whatever constraints can be imposed are helpful -- but this probably isn't the full answer. We could hope for better politicians, people who represent everyone equally, including the powerless, but I'm certainly not going to count on that either. Finally, we could try to provide (or at least not discourage) a countervailing force, something that replaces the role that unions played for the working class. I'm not completely sure what form this institution should take, workers lack both economic power in wage negotiations and political power to shape legislation in their favor, or how it could happen short of fed up workers finally demanding change. But workers need to have their interests better represented, and the need for a new institution of some sort is clear.
Posted by Mark Thoma on Tuesday, May 15, 2012 at 12:15 AM in Economics, Fiscal Policy, Politics |
Posted by Mark Thoma on Tuesday, May 15, 2012 at 12:06 AM in Econometrics, Links |
Another reminder that the long-run budget problem is a health care cost problem, a problem that exists in both the private sector and in government. This is Nancy Folbre:
...Spending on Social Security, often treated as the greatest bugaboo of our aging society, has remained at 4.5 to 5 percent of G.D.P. since 1985. The already carried out transition to a higher retirement age is contributing to cost containment.
The scary increases in government spending have come in Medicaid and Medicare. These two programs, which consumed 1.2 percent of G.D.P. in 1975, reached 4.1 percent of G.D.P. in 2008.
These increases have less to do with government spending than with the increased costs of health care, regardless of who is paying the bill. ...
All government programs deserve critical scrutiny, and there is plenty of room for meaningful debate over the relative efficiency of public versus private provision. But there is no evidence that social spending in the United States is approaching some upper limit of feasibility.
What is unsustainable (or should be) is the current level of confusion, misinformation and paranoia about the future of the so-called welfare state.
Posted by Mark Thoma on Monday, May 14, 2012 at 04:27 PM in Budget Deficit, Economics, Health Care, Social Insurance, Social Security |
I've argued again and again that the costs associated with policy errors are asymmetric, and that we'd be better off making the mistake of doing too much rather than too little. This was based on the claim that the costs of high unemployment are larger than the costs of inflation, but as Simon Wren-Lewis shows, this is not the only way to derive this policy result (i.e. the need for more aggressive fiscal policy can be justified in more than one way):
The Zero Lower Bound and Output Gap Uncertainty, by Simon Wren-Lewis: There is currently a great deal of uncertainty about the size of the output gap in the US, UK and elsewhere. Given the significant lags between fiscal policy decisions and their impact, does that mean we should be especially cautious in setting policy? This might seem like a rather academic question at present, because policymakers are not even trying to use fiscal policy to close the output gap... However, uncertainty about the output gap is often used as a justification for maintaining current policies, so it is a relevant question in that sense.
I believe that there is a strong argument that goes in exactly the opposite direction. Uncertainty about the output gap should make us less cautious. This argument rests on two very reasonable assumptions: that monetary policy can impact on the economy more rapidly than fiscal policy, and that the Zero Lower Bound (ZLB) for nominal interest rates means that there is an asymmetry in what monetary policy can do. Let me try and illustrate the point with some stylised numbers. ...
In turns out we do better under the overshooting policy... If this result seems paradoxical, think of it this way. In [the] scenario ... where the current output gap is higher than we think it is, we can do nothing to correct our error. We suffer the full consequences of our mistake: higher unemployment. However in the opposite case,... where the output gap is lower than we think, we have an insurance policy that can cover our mistake to some extent, because we can raise interest rates to moderate inflation. Because of the ZLB, this insurance policy only operates one way.
Now of course these numbers are arbitrary, but the principle holds: with a one way insurance policy, its best to go for an overshooting policy to some degree. ... It is best to aim too high, because we have a one-way insurance policy. This is why a government that undertook austerity based on the assumption that, if everything went as expected, things would turn out OK was making an obvious mistake – the ZLB meant it had no option if things turned out worse. So, the next time someone argues that we need austerity because we are uncertain about how large the output gap is, ask them why they are ignoring the option of raising interest rates if core inflation starts to rise.
Posted by Mark Thoma on Monday, May 14, 2012 at 11:07 AM in Economics, Fiscal Policy |
The financial industry needs better safeguards against excessive, potentially costly risk-taking:
Why We Regulate, by Paul Krugman, Commentary, NY Times: ...Jamie Dimon, the chairman and C.E.O. of JPMorgan Chase,... has ... been fond of giving ... speeches about how he and his colleagues know what they’re doing, and don’t need the government looking over their shoulders. So there’s a large heap of poetic justice — and a major policy lesson — in JPMorgan’s shock announcement that it somehow managed to lose $2 billion in a failed bit of financial wheeling-dealing.
Just to be clear, businessmen ... make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. ...
So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance... Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.
This system gave us half a century of relative financial stability. Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated...
It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics. It’s clear, that is, to everyone except bankers and the politicians they bankroll... Did I mention that Wall Street is giving vast sums to Mitt Romney, who has promised to repeal recent financial reforms?
Enter Mr. Dimon. JPMorgan ... managed to avoid many of the bad investments that brought other banks to their knees. This apparent demonstration of prudence has made Mr. Dimon the point man in Wall Street’s fight to delay, water down and/or repeal financial reform. ... Just trust us, the JPMorgan chief has in effect been saying; everything’s under control.
Apparently not. ...
For the moment Mr. Dimon seems chastened, even admitting that maybe the proponents of stronger regulation have a point. It probably won’t last; I expect Wall Street to be back to its usual arrogance within weeks if not days.
But the truth is that we’ve just seen an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Mr. Dimon.
Posted by Mark Thoma on Monday, May 14, 2012 at 12:33 AM in Economics, Regulation |
Jeffrey Toobin on the Citizens United decision:
How Chief Justice John Roberts orchestrated the Citizens United decision, New Yorker: ...In one sense, the story of the Citizens United case goes back more than a hundred years. It begins in the Gilded Age, when the Supreme Court barred most attempts by the government to ameliorate the harsh effects of market forces. In that era, the Court said, for the first time, that corporations, like people, have constitutional rights. The Progressive Era, which followed, saw the development of activist government and the first major efforts to limit the impact of money in politics. Since then, the sides in the continuing battle have remained more or less the same: progressives (or liberals) vs. conservatives, Democrats vs. Republicans, regulators vs. libertarians. One side has favored government rules to limit the influence of the moneyed in political campaigns; the other has supported a freer market, allowing individuals and corporations to contribute as they see fit. Citizens United marked another round in this contest.
In a different way, though, Citizens United is a distinctive product of the ... aggressive conservative judicial activism of the Roberts Court. It was once liberals who were associated with using the courts to overturn the work of the democratically elected branches of government, but the current Court has matched contempt for Congress with a disdain for many of the Court’s own precedents. ... Roberts, more than anyone, shaped what the Court did. As American politics assumes its new form in the post-Citizens United era, the credit or the blame goes mostly to him.
Even if you take a market based approach to the problem, there's still a reason to limit the influence of particular groups of individuals, i.e. those with the money to put into politics. A "free" market monopolized by a few individuals is not optimal, and that's true in political markets as well. The need for more institutional structure of the type Democrats favor to make these markets more competitive -- i.e. to remove the ability of those with money to have an undue influence on the outcome -- seems clear.
Posted by Mark Thoma on Monday, May 14, 2012 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Monday, May 14, 2012 at 12:06 AM in Economics, Links |
This Column Is Not Sponsored by Anyone, by Thomas Friedman, Commentary, NY Times: ...Harvard philosopher Michael Sandel ... sees ... a bad trend:...
Throughout our society, we are losing the places and institutions that used to bring people together from different walks of life. Sandel calls this the “skyboxification of American life,” and it is troubling. Unless the rich and poor encounter one another in everyday life, it is hard to think of ourselves as engaged in a common project. At a time when to fix our society we need to do big, hard things together... And we should be asking how to rebuild class-mixing institutions.
“Democracy does not require perfect equality,” he concludes, “but it does require that citizens share in a common life. ... For this is how we learn to negotiate and abide our differences, and how we come to care for the common good.”
That's sort of what I was getting at when I talked about one way to defend progressive taxation. There are times when progressive taxes make it possible to provide public goods and services that couldn't be provided otherwise. With these projects, everyone gets value in excess of their contributions, i.e. everyone can be made better off. But there is a critical requirement that the well-off and the not-so-well-off share common facilities:
This is, of course, an argument for the government provision of certain types of goods through a tax structure that requires the wealthy to pay a larger share of the bill..., but here’s the problem. This only works if the rich and the poor live in the same neighborhoods, share the same roads, use the same parks, attend the same schools, and so on. In an increasingly divided economy and society – as in the US in recent decades – the opportunities for mutually beneficial arrangements diminish. If the wealthy do not attend the same schools, live in the same areas as the poor, have special lines at airports, shun public pools, have their own tennis courts, golf courses, and parks, if they have helicopters to avoid city traffic, their own security arrangements independent of the police – the list goes on and on – then these opportunities are lost. ...
The more divided our society becomes, and the divisions are growing, the less shared experience we will have. The rich live in one world, the poor in another, and mutually beneficial arrangements between the two groups fail to occur.
And we are all worse off because of it.
There's no reason to think that this problem will necessarily fix itself.
Posted by Mark Thoma on Sunday, May 13, 2012 at 11:01 AM in Economics |
Why is the left so much more willing than the right to criticize members of its own team when they mis-step? There seems to be far more people on the left criticizing Obama than Republicans criticizing Bush, especially when it comes to economic policy. Why?
A. There really isn't a difference, both sides are equally willing to criticize their own team. Look at how the left backed off on the war once Obama was in charge.
B. The Obama administration has made more and bigger mistakes.
C. Republican pundits face a much larger penalty when they deviate from the team message, criticize policy, etc.
D. Democrats are a much more diverse group, including and perhaps especially when it comes to economic policy, so disagreements are more likely. There is no single, dominant, well-known party line on every issue as there is for the GOP.
E. It arises from a fundamental difference the psychological make-up of the two sides, with the right far more likely to be populated by leader-follower types than the left. Sheep can be herded, cats cannot.
F. The left has been losing ground the last few decades as market fundamentalism, attacks on social programs such as welfare, and so on have taken hold, and hence there is considerale frustration with Obama's inability to reverse those trends.
G. The media is more likely to highlight disagreements on the left.
H. The left is more likely than the right to sway leaders toward the policies they favor, so they are more likely to speak ou when they disagree
I think there is a diffeence, so A is out and I don't think it's because there were more/bigger mistakes by Obama, especially if we expand beyond economics to the war. So I won't choose B either (I've been disappointed with the left on its willingness to criticize Obama on the war/civil liberties issue, but I still think there's been more opposition to Obama from the left than there was for Bush from the right, but that may be because there was more agreement with the policy on the right). Answers E, F, G, and H don't ring true, at least to me, so I think it's mostly a combination of C and D. But I also have the feeling I'm missing something. What is your explanation, if you think one is needed? Is it on the list? What should be listed under "other"?
Posted by Mark Thoma on Sunday, May 13, 2012 at 09:49 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, May 13, 2012 at 12:06 AM in Economics, Links |
Slippery-Slope Logic, Applied to Health Care, by Richard Thaler, Commentary, NY Times: There are lots of important things to worry about these day... So it is important that we limit our worries to real as opposed to imaginary risks.
One pernicious category of imaginary risks involves ... dreaded “slippery slope” arguments. Such arguments are dangerous because they are popular, versatile and often convincing, yet completely fallacious. Worse, they are creeping into ... the Supreme Court ... deliberations on health care reform.
There is a DirecTV ad that humorously illustrates the basic form of the slippery-slope argument. A foreboding announcer intones a list of syllogisms that are enacted on screen: “When your cable company puts you on hold, you get angry. When you get angry, you go blow off steam. When you go blow off steam, accidents happen.” Later, we reach the finale: “You wake up in a roadside ditch. Don’t wake up in a roadside ditch.” ... The idea is that while Policy X may be acceptable, it will inevitably lead to the terrible Outcome Y... The problem is that such arguments are often made without any evidence that doing X makes Y more likely, much less inevitable. ...
Given how flimsy slippery-slope arguments can be, it is downright scary that they might play an important role in the Supreme Court decision on ... whether it is constitutional for the federal government to penalize people who fail to buy health insurance. ...
Consider these now-famous comments about broccoli from Justice Antonin G. Scalia during the oral arguments. “Everybody has to buy food sooner or later, so you define the market as food,” he said. “Therefore, everybody is in the market. Therefore, you can make people buy broccoli.” Showing remarkable restraint, he did not mention anything about ending up in a roadside ditch. ...
Please stop! The very fact that a slippery slope is being cited as grounds for declaring the law unconstitutional ... tells you all that you need to know about the argument’s validity. Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect? ... Surely, the justices have the conceptual resources to draw a distinction between the health care market and the market for broccoli. And even if they don’t, then all the briefs, the zillions of blog posts and a generation’s worth of economic literature can help them.
More generally, we would be better off as a society if we could collectively agree to ignore all slippery-slope arguments that aren’t accompanied by evidence that said slope exists. ...
Posted by Mark Thoma on Saturday, May 12, 2012 at 03:59 PM in Economics, Health Care, Market Failure, Regulation |
Jonathon Portes bangs his head against the wall over economic policy in the UK:
Four charts and why history will judge us harshly, Not the Treasury View: When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:
"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense. "
The charts below (click on each to enlarge) try to illustrate this. ...
[P]ublic sector net investment - spending on building roads, schools and hospitals - has been cut by about half over the last three years, and will be cut even further over the next two. Hardly surprising that the construction sector has been a heavy drag on output and jobs recently.
[Source: OBR, March 2012]
But, at the same time, the cost to the government of borrowing money - the real interest rate on gilts - is at historically low levels. Not to put too fine a point on it, the government can borrow money for basically nothing. ...
What does this mean in practice? It means that if the government were, as I suggest, to fund a £30 billion (2% of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers - the interest on those gilts - would be something like £150 million a year. To put this in perspective, it's roughly the revenue the OBR estimates will be raised by the "loophole-closing VAT measures" in the last Budget. In other words, we could fund a massive job-creating infrastructure programme with the pasty tax.
Twenty, or fifty, years from now, economic historians will look back at the decisions we are taking now. I cannot imagine that they will be anything but incredulous and horrified that - presented with these charts and figures - policymakers did nothing, international organisations staffed with professional economists encouraged them in their inaction, and commentators and academic economists (thankfully, few in the UK) came up with ever more tortuous justifications. In Simon Wren-Lewis' words, they will ask why "a large section of the profession, and the majority of policymakers, appeared to ignore what mainstream macro [and, I would add, basic common sense] tells us". Their judgement will be harsh.
Regarding a recent debate, that sure looks like a form of austerity to me (though the graph begins in 2008 and I'm not sure what a longer series would show). But in any case, the same comments about the need for public investment apply here in the US, and the judgment of history will be just as "incredulous and horrified."
Posted by Mark Thoma on Saturday, May 12, 2012 at 09:06 AM in Economics, Fiscal Policy, Unemployment |
Posted by Mark Thoma on Saturday, May 12, 2012 at 12:06 AM in Economics, Links |
Yesterday, Tim Duy reacted to the troubles at JP Morgan Chase with "Too Big To Fail Lives On." Simon Johnson agrees, and says it's time to change the rules:
JP Morgan Debacle Reveals Fatal Flaw In Federal Reserve Thinking, y Simon Johnson: Experienced Wall Street executives and traders ... always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated – everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.
In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model. But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed.
JP Morgan claimed to have great risk management systems – and these are widely regarded as the best on Wall Street. But what does the “best on Wall Street” mean when bank executives and key employees have an incentive to make and misrepresent big bets – they are compensated based on return on equity, unadjusted for risk? Bank executives get the upside and the downside falls on everyone else – this is what it means to be “too big to fail” in modern America.
The Federal Reserve knows this, of course – it is stuffed full of smart people. ... To prevent this..., the Fed now runs regular “stress tests” to assess how much banks could lose – and therefore how much of a buffer they need in the form of shareholder equity. In the spring, JP Morgan passed the latest Fed stress tests with flying colors. ...
The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control what is going on. ... And the regulators also have no idea about what is going on. Attempts to oversee these banks in a sophisticated and nuanced way are not working....
Anat Admati and her colleagues at Stanford (and her growing band of supporters in the US and around the world) are right about bank capital. The people in charge of Federal Reserve policy in this regard are dead wrong...
Ms. Admati skewered Jamie Dimon at length and in detail 18 months ago on exactly these issues. You must read her original Huffington Post piece. She has been relentless ever since – see this material. She was right then and she is right now: we need much higher capital requirements and much simpler rules – focus on limiting leverage. Big banks should be forced to become smaller – small enough and simple enough to fail.
It is time for the Federal Reserve to move its policy on these issues.
Posted by Mark Thoma on Friday, May 11, 2012 at 08:53 AM in Economics, Financial System, Regulation |
This article on why ending unemployment benefits will hurt individuals and the economy has quite a bit of editing, e.g. the figures noted in the title were added, but it's mostly me:
Cutting Unemployment Benefits will not Solve the Unemployment Problem
Some people claim that cutting benefits will motivate people to get jobs, but that is unlikely, especially when there are still so few jobs to be found and the net effect of these cuts will be negative.
Posted by Mark Thoma on Friday, May 11, 2012 at 08:02 AM in Economics, Unemployment |
The problems with some "authoritative-sounding figures" standing in the way of helping the unemployed appear to be deep and structural:
Easy Useless Economics, by Paul Krugman, Commentary, NY Times: A few days ago, I read an authoritative-sounding paper in The American Economic Review, one of the leading journals in the field, arguing at length that the nation’s high unemployment rate had deep structural roots and wasn’t amenable to any quick solution. The author’s diagnosis was that the U.S. economy just wasn’t flexible enough to cope with rapid technological change. The paper was especially critical of programs like unemployment insurance, which it argued actually hurt workers because they reduced the incentive to adjust.
O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States ... began a large military buildup, finally providing fiscal stimulus ... commensurate with the depth of the slump. And, in the two years after that article ... was published,... nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today.
So now we’re in another depression, not as bad as the last one, but bad enough. And, once again, authoritative-sounding figures insist that our problems are “structural,” that they can’t be fixed quickly. ...
So what’s with the obsessive push to declare our problems “structural” ... no matter how much contrary evidence is presented[?]
The answer, I’d suggest, lies in the way claims that our problems are deep and structural offer an excuse for not acting ... to alleviate the plight of the unemployed.
Of course, structuralistas say they are not making excuses..., that their real point is that we should focus not on quick fixes but on the long run...
John Maynard Keynes had these peoples’ number more than 80 years ago. “But this long run,” he wrote, “is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.”
I would only add that inventing reasons not to do anything about current unemployment isn’t just cruel and wasteful, it’s bad long-run policy, too. For there is growing evidence that the corrosive effects of high unemployment will cast a shadow over the economy for many years to come. ...
So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop.
Posted by Mark Thoma on Friday, May 11, 2012 at 12:24 AM
Posted by Mark Thoma on Friday, May 11, 2012 at 12:06 AM in Economics, Links |
How likely is it that the unemployment rate will fall to 7.5% by the end of 2013? The answer depends critically on assumptions about the labor force participation rate (I suppose I should add that while policymakers are likely to hope for the best course for unemployment, they should avoid the temptation to use the best possible scenario as an excuse to avoid hard policy decisions -- they should be prepared for, and take actions to prevent the worst outcome):
A take on labor force participation and the unemployment rate, by David Altig, macroblog: By now, if you've been paying attention to the coverage following the April employment report, you know the following:
||The March to April decline in the unemployment rate from 8.2 percent to 8.1 percent was arithmetically driven by yet another decline in the labor force participation rate (LFPR).
||The decline in the LFPR, now at its lowest level since the early 1980s, is itself being influenced by a confounding mix of demographic change and other behavioral changes that nobody seems to understand—a point emphasized by a gaggle of blogs and bloggers such as Brad DeLong, Carpe Diem, Conversable Economist, Free Exchange, and Rortybomb, to name a few.
With respect to the first observation, in a previous post my colleague Julie Hotchkiss described how to use our Jobs Calculator to get a ballpark sense of what the unemployment rate would have been had the LFPR not changed. If you follow those procedures and assume that the LFPR had stayed at the March level of 63.8 percent instead of falling to 63.6 percent, the unemployment rate would have risen to 8.4 percent instead of falling to 8.1 percent.
It is clear that interpreting this sort of counterfactual experiment depends critically on how you think about the decline in the LFPR. The aforementioned post at Rortybomb cites two Federal Reserve studies—from the Chicago Fed and the Kansas City Fed—that attempt to disentangle the change in the LFPR that can be explained by trends in the age and composition of the labor force. These changes are presumably permanent and have little to do with questions of whether the labor market is performing up to snuff.
The following chart, which throws our own estimates into the mix, illustrates the evolution of the actual LFPR along with an estimate of the LFPR adjusted for demographic changes:
As the header on the chart indicates, our estimates suggest that roughly 40 percent of the change in the LFPR since 2000 can be accounted for by changes in age and composition of the population—in essentially the same range as the Chicago and Kansas City Fed studies. (If you are interested in the technical details you can find a description of the methodology used to generate the chart above, based on work by the University of Chicago's Rob Shimer.
In other words, 0.9 percentage points of the decline in the LFPR since the beginning of the past recession can be explained by demographic trends (as the baby boomers age, the labor force will grow more slowly than the total population [ages 16 and up]). Subtracting the demographic trends still leaves 1.5 percentage points to be explained, a number right in line with Brad DeLong's back-of-the-envelope calculation of "cyclical" LFPR change.
As DeLong's comments make clear, the interpretation of the nondemographic piece of the LFPR change requires, well, interpretation. And the consequences of connecting the dots between changes in the unemployment rate and broader labor market performance are enormous.
In the recently released Summary of Economic Projections following the last meeting of the Federal Reserve's Federal Open Market Committee, the midpoint of the projections for the unemployment rate at the end of 2013 is 7.5 percent. Turning again to our Jobs Calculator, we can get a sense of what sort of job creation over the next 20 months will be required given different values of the LFPR. For these estimates, I consider three alternatives: The LFPR stays at its April level, the LFPR reverts to our current estimate of the demographically adjusted level (that is, increases by 1.5 percentage points), and an intermediate case in which the LFPR increases by 0.7 percentage points—the lower end of DeLong's estimate of "people who really ought to be in the labor force right now, but who are not."
"Are [people who really ought to be in the labor force right now, but who are not] now part of the 'structurally' non-employed who we will never see back at work, barring a high-pressure economy of a kind we see at most once in a generation?"
As you can see, the answer to that question matters a lot to how we should think about progress on the unemployment rate going forward.
Posted by Mark Thoma on Thursday, May 10, 2012 at 12:31 PM in Economics, Unemployment |
It's hard to say this enough. The long-run budget problem is a health care cost problem, "which affect costs for private-sector care as much as for Medicaid and other government health care programs":
Federal spending on low-income programs has gone up considerably in recent years, a development discussed at a recent House Budget Committee hearing. A new CBPP analysis examines why and explains that low-income programs outside of health care are not a factor in our serious long-term budget problems. Here’s the opening:
Several conservative analysts and some journalists lately have cited figures showing substantial growth in recent years in the cost of federal programs for low-income Americans. These figures can create the mistaken impression that growth in low-income programs is a major contributor to the nation’s long-term fiscal problems.
In reality, virtually all of the recent growth in spending for means-tested programs is due to two factors: the economic downturn and rising costs throughout the U.S. health care system, which affect costs for private-sector care as much as for Medicaid and other government health care programs.
Moreover, Congressional Budget Office (CBO) projections show that federal spending on means-tested programs other than health-care programs will fall substantially as a percent of gross domestic product (GDP) as the economy recovers — and fall below its average level as a percent of GDP over the prior 40 years, from 1972 to 2011. Since these programs are not rising as a percent of GDP, they do not contribute to our long-term fiscal problem. ...
Federal spending for low-income discretionary programs is virtually certain to fall as a percent of GDP in the coming decade as well. Under the Budget Control Act’s funding caps, non-defense discretionary spending will fall over the decade to its lowest level as a percent of GDP since 1962 (and probably earlier).
As a result, total spending for low-income programs outside health care — both mandatory and discretionary programs — is expected to fall over the coming decade to a level below its prior 40-year average.
This won't stop conservatives from using the deficit as a battering ram to assault social insurance -- facts haven't stopped them yet and they won't matter now -- particularly since the media is so willing to play along. [More here.]
Posted by Mark Thoma on Thursday, May 10, 2012 at 10:32 AM in Budget Deficit, Economics, Politics, Social Insurance |
I think it would be faid to say that James Hanson is not a tar sands advocate:
Game Over for the Climate, by James Hansen, Commentary, New York Times: Global warming isn’t a prediction. It is happening. That is why I was so troubled to read a recent interview with President Obama ... in which he said that Canada would exploit the oil in its vast tar sands reserves “regardless of what we do.”
If Canada proceeds, and we do nothing, it will be game over for the climate..., concentrations of carbon dioxide in the atmosphere eventually would reach levels higher than in the Pliocene era, more than 2.5 million years ago, when sea level was at least 50 feet higher than it is now. ... Sea levels would rise and destroy coastal cities. Global temperatures would become intolerable. Twenty to 50 percent of the planet’s species would be driven to extinction. Civilization would be at risk.
That is the long-term outlook. But near-term, things will be bad enough. Over the next several decades, the Western United States and the semi-arid region from North Dakota to Texas will develop semi-permanent drought... Economic losses would be incalculable. ...
If this sounds apocalyptic, it is. This is why we need to reduce emissions dramatically. President Obama has the power not only to deny tar sands oil additional access to Gulf Coast refining,... but also to encourage economic incentives to leave tar sands and other dirty fuels in the ground. ...
We should impose a gradually rising carbon fee,... then distribute 100 percent of the collections to all Americans ... every month. The government would not get a penny. ... Not only that, the reduction in oil use resulting from the carbon price would be nearly six times as great as the oil supply from the proposed pipeline from Canada, rendering the pipeline superfluous...
But instead..., the world’s governments are forcing the public to subsidize fossil fuels with hundreds of billions of dollars per year. ...
President Obama speaks of a “planet in peril,” but he does not provide the leadership needed to change the world’s course. ... The science of the situation is clear — it’s time for the politics to follow. ... Every major national science academy in the world has reported that global warming is real, caused mostly by humans, and requires urgent action. The cost of acting goes far higher the longer we wait — we can’t wait any longer to avoid the worst and be judged immoral by coming generations.
Posted by Mark Thoma on Thursday, May 10, 2012 at 09:38 AM in Economics, Environment, Market Failure |
Posted by Mark Thoma on Thursday, May 10, 2012 at 12:06 AM in Economics, Links |
The heterodox view:
From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics, by Thomas Palley: Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do.
Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.
The government failure argument holds the crisis is rooted in the U.S. housing bubble and bust which was due to failure of monetary policy and government intervention in the housing market. With regard to monetary policy, the Federal Reserve pushed interest rates too low for too long in the prior recession. With regard to the housing market, government intervention drove up house prices by encouraging homeownership beyond peoples’ means. The hardcore perspective therefore characterizes the crisis as essentially a U.S. phenomenon.
The softcore neoliberal market failure argument holds the crisis is due to inadequate financial regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators allowed perverse incentive pay structures within banks that encouraged management to engage in “loan pushing” rather than “good lending.” Third, regulators pushed both deregulation and self-regulation too far. Together, these failures contributed to financial misallocation, including misallocation of foreign saving provided through the trade deficit. The softcore perspective is therefore more global but it views the crisis as essentially a financial phenomenon.
The progressive “destruction of shared prosperity” argument holds the crisis is rooted in the neoliberal economic paradigm that has guided economic policy for the past thirty years. Though the U.S. is the epicenter of the crisis, all countries are implicated as they all adopted the paradigm. That paradigm infected finance via inadequate regulation and via faulty incentive pay arrangements, but financial market regulatory failure was just one element. ...
The neoliberal economic paradigm was adopted in the late 1970s and early 1980s. For the period 1945 - 1975 the U.S. economy was characterized by a “virtuous circle” Keynesian model built on full employment and wage growth tied to productivity growth. ...
After 1980 the virtuous circle Keynesian model was replaced by a neoliberal growth model that severed the link between wages and productivity growth and created a new economic dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset price inflation became the engine. ...
For proponents of the destruction of shared prosperity hypothesis the policy response is ... to overthrow the neoliberal paradigm and replace it with a “structural Keynesian” paradigm that ... restores the link between wage and productivity growth. ... That requires replacing corporate globalization with managed globalization; restoring commitment to full employment; replacing the neoliberal anti-government agenda with a social democratic government agenda; and replacing the neoliberal labor market flexibility with a solidarity based labor market agenda.
Managed globalization means a world with labor standards, coordinated exchange rates, and managed capital flows. A social democratic agenda means government ensuring adequate provision of social safety nets, fundamental needs such as healthcare and education, and secure retirement incomes. A solidarity based labor market means balanced bargaining power between workers and corporations which involves union representation, adequate minimum wages and unemployment insurance, and appropriate employee rights and protections. ...
Posted by Mark Thoma on Wednesday, May 9, 2012 at 05:33 PM in Economics, Methodology |
One more from Tim Duy:
Hopeful Signs From Europe?, by Tim Duy: While I suspect this is a case of too little, too late, it is increasingly evident that European policymakers on some level realize the errors of their ways. From the Wall Street Journal:
Euro-zone governments are expected to give Spain more leeway to meet its budget-deficit target next year, according to officials involved in the discussions, in a sign they intend to shift away from rigid enforcement of the currency bloc's budget rules.
Austerity will still be the guiding principle of European fiscal policies. But the likely Spanish move suggests the rules will be adjusted in some cases to account for the fact that when economies go into recession, their budget deficits usually rise.
Officials said the flexibility is unlikely to stop with Spain's politically sensitive deficit target. Among other countries that may take advantage of the rules in the future is France, which would have to pass large cuts to achieve its current deficit target for next year—a task likely to clash with the pledges of Socialist President-elect François Hollande to spur economic growth.
It is not clear that this shift gives struggling nations enough room, but it is a step in the right direction that policymakers now recognize that austerity programs have been self-defeating. Likewise, perhaps even the Bundesbank is coming around to the realities of European adjustment. From the FT:
The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.
A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday.
That said, I wouldn't get too eager that the Bundesbank is eager to rush into more easing:
“In this scenario, Germany could in the future have an inflation rate somewhat above the average within the European monetary union, although monetary policy will have to ensure that inflation overall in the Emu is consistent with the goal of price stability and that inflation expectations remain firmly anchored,” the bank said.
They are not talking about easing overall policy, just acknowledging that even in the context of a maintained inflation target, Germany will experience inflation in excess of that target.
All in all, though, positive developments, at least at the margin. My concern is that all the recent talk about "growth compacts" and such will yield more headlines than positive outcomes, and as a consequence policymakers will begin to believe that the original path of austerity was in fact the only path to follow.
Posted by Mark Thoma on Wednesday, May 9, 2012 at 03:30 PM in Economics, Fed Watch, International Finance |
On Negative Interest Rates, by Tim Duy: Scott Sumner writes:
I don’t think Keynesians should be arguing that lower real interest rates are the key to recovery. A bold and credible monetary stimulus that was expected to produce much faster NGDP growth might well raise long term risk-free interest rates.
This point doesn't get explained well - and I probably won't do any better, but I will give it a try anyway. A simple way to think about this is the basic IS-LM story (without wanting to get into a big debate about the efficacy of IS-LM):
In this version, the IS curve has shifted so far to the left that it intersects with the LM curve at the horizontal section - the zero bound problem. If I set i equal to the nominal interest rate and assume positive inflation, this translates to a negative real rate. Full employment, however, is only consistent with a nominal interest rate below zero, which implies a lower real interest rate as well. Given the zero bound on nominal rates, Keynesians (using the term loosely; labels can get sloppy), turn their attention to reducing the real interest rate.
Given the zero bound, we talk about ways to shift the IS curve to the right. Usually, these discussions take on two forms. The first is fiscal policy via deficit spending, which I am very confident will do the trick, but I am also very confident it really doesn't "fix" the economy. The instant you back off the fiscal accelerator, the economy falters. In my mind, fiscal policy is undoubtedly necessary in the near-term as a stop-gap measure, but in the long-term is leading the US down the Japanese path of endless deficit spending.
The second policy response is monetary, typically raising inflation expectations. This in turn lowers real interest rates - and this is the important part - at all nominal interest rates. This, like fiscal policy, induces a rightward shift in the IS curve:
At the zero bound, higher inflation expectations lowers the real interest rate, hence the Keynesian preoccupation. But I think the key here is the rightward shift of the IS curve past the zero bound "kink" at which point nominal and real rates begin to rise and we lift off the zero bound. We can talk about different mechanisms to accomplish this, but moving sustainably beyond that kink should be the ultimate policy goal.
Thus, ultimately I think you can have a focus on negative real interest rates as a stop on the path to Sumner's desired outcome. And I completely agree with Sumner (and I think I am paraphrasing him correctly here) in that the failure of interest rates both real and nominal to rise represents an absolute, unmitigated, unacceptable, and quite frankly irresponsible failure on the part of the Federal Reserve:
One would think the Fed would sit up and take notice that the US government sold 10 year debt at a record low interest rate today as a sign that they need to do more, not less. Notice also the failure of either real or nominal rates to get a boost after Operation Twist. This is evidence of the pointlessness of that effort. For all the grief I have given St. Louis Federal Reserve President James Bullard, he certainly had it right last year when he said:
A strategy aimed at lowering longer-term borrowing costs, sometimes referred to as a twist operation, would help drive down longer-term borrowing costs for businesses, economists say.
But James Bullard, president of the St. Louis Fed, said the effectiveness of such a strategy is questionable.
"A twist operation would not have very much effect," Bullard told Reuters Insider in an interview. "It's been analyzed many times, and the general tenor of that analysis is that it did not have very much effect."
Finally, notice that I also put the variable "confidence" into the specification for the IS curve. Here I am offering another mechanism by which we can think that QE has an impact by signaling that policymakers have an intention and a desire to maintain the pre-recession path of nominal spending (here I am paraphrasing Brad DeLong). The failure to maintain that path has undermined confidence in that agents now have less certainty in the future path of income. If policymakers let the path of nominal spending shift downward once, why should we not expect them to do it again?
Bottom Line: I don't think what Sumner describes as a Keynesian focus on negative real interest rates is inconsistent with his views on what should happen in the presence of a credible monetary policy committed to actually lifting us off the zero bound.
Posted by Mark Thoma on Wednesday, May 9, 2012 at 02:12 PM in Economics, Fed Watch, Monetary Policy |
In the Financial Times, Roger Farmer notes a close association between Fed policy and stock market values:
 Is the date at which QE1 began,  Is the date at which the Fed started to buy mortgage backed securities,  Is the date at which QE1 ended, and  Is the date of the Jackson Hole conference at which the Fed announced that it would begin QE2.
How can central banks use this information? He says the stock market crash *caused* the Great Recession. Thus, if the Fed can raise stock market values, and the graph above suggests it can, it will turn the economy around and reduce unemployment:
The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment. ...
The chart shows that when the Fed began to purchase mortgage backed securities in March of 2009, the stock market began to rally. When QE1 ended a year later, the market tanked and equities did not recover until the Fed saw the error of its ways. When the Fed announced the beginning of QE2, at the Jackson Hole conference in April of 2010, there was a third turning point in the market and the beginning of a new bull market.
The coincidence of these market turning points with the beginning and ending of Fed asset purchase programs is not accidental. The Fed moves markets!
So what! Who cares if a bunch of Wall Street investors make money? ... There is a connection between the stock market and the welfare of the average citizen... When the stock market plummets, so do the prospects of the average worker.
In the paper he cites as making the case that the relationship is causal, i.e. that stock market values cause unemployment (the argument is theoretical), he says:
I realize that correlation is not causation and these graphs do not prove that the stock market crash caused the Great Depression. However, they do suggest to me that a theory that does make that causal link deserves further consideration.
The paper includes the following graphs:
Figure 1: Unemployment and the Stock Market During the Great Depression
Figure 2: Unemployment and the Stock Market over the Last Decade
I am not yet fully convinced that causality runs from stock values to unemployment, it seems more likely that economic conditions cause both. However, I agree that central banks should do more, and this is evidence that the case for doing more can be derived from more than one theoretical construct, i.e. that it is relatively robust.
Posted by Mark Thoma on Wednesday, May 9, 2012 at 11:22 AM in Economics, Financial System, Monetary Policy, Unemployment |
This study from Basit Zafar, Grant Graziani, and Wilbert van der Klaauw of the NY Fed shows that the payroll tax cuts in the stimulus package have been used mostly to pay off debt and add to savings -- around 40% went to consumption. Does the relatively low amount that went to consumption mean the payroll tax cuts didn't work? As I've argued before, the 60% that went to saving and debt reduction represents balance sheet rebuilding, something that has to happen before households can return to more normal expenditure patterns. This may mean "that our estimated MPC [of .405] is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments." And it's not just a reduction in interest, once balance sheets are rebuilt the amount of income that goes to consumption instead of saving and debt reduction ought to go up:
A Boost in Your Paycheck: How Are U.S. Workers Using the Payroll Tax Cut?, by Basit Zafar, Grant Graziani, and Wilbert van der Klaauw, Liberty Street Economics, FRB NY: Over the past several months, there was a flurry of debate in Washington over the extension of the payroll tax cut. Many supporters of the tax cut—worth about $1,000 to a family earning the median income of slightly more than $50,000 a year—have cited its importance to the nation’s economic recovery, while opponents claim that it will only add to the national deficit without boosting the economy. Exactly how such a tax cut affects the aggregate economy relies heavily on how U.S. workers use the extra funds in their paychecks. Unfortunately, we know little about how such tax cuts are used by workers. So we decided to ask them and, in this post, report the answers they gave us.
The initial payroll tax cut, passed into law as part of the 2010 Tax Relief Act, reduced workers’ Social Security tax withholding rate from 6.2 percent to 4.2 percent for all of 2011. After much legislative debate, the 2 percent payroll tax cut for nearly 160 million U.S. workers was extended in December 2011 for the first two months of 2012, and then again on February 22, 2012, for the rest of the year. In order to understand how these cuts might affect economic activity, we used the RAND Corporation’s American Life Panel (ALP) to conduct online surveys of 372 individuals, 200 of whom were working, at two points last year: in February 2011, and then in mid-December 2011, close to the expiration of the initial tax cuts.
In the first survey, we asked respondents how they intended to spend any extra funds from the payroll tax cut in their paychecks. More precisely, respondents were asked to provide the share (out of 100 percent) of funds that they would spend on: consuming, saving, and paying off debt. The table below shows that 8.8 percent of respondents planned to use most of the tax-cut funds for consumption, 39.8 percent planned to use majority of it on saving, and 50.3 percent planned to use a majority of it to pay off debt. Such a low intended rate of consumption is consistent with the permanent income hypothesis, which claims that transitory changes in income should not change consumption behavior, as individuals would use the extra funds to smooth their consumption over the rest of their lifetime.
To explore the relationship between the perceived permanence of the tax cuts and the intention to spend the funds, we also asked respondents how likely they thought it was that the tax-cut extensions would continue into future years. The table below shows how intended consumption patterns relate to the perceived likelihood of future tax-cut extensions. On average, those who consider long-term extensions to be likely plan to spend about 8 percentage points more of their tax-cut funds than those who consider them to be unlikely (20.5 percent compared with 12.6 percent). Additionally, the last three columns of the table show that when comparing the two groups, a higher proportion of the “likely” group intend to use the majority of their tax-cut funds for consumption (17.9 percent compared with 8.1 percent). This supports the permanent income hypothesis, as those who consider these tax cuts to be more permanent plan to spend more of the extra funds.
In the second survey, conducted in December 2011, respondents were asked how they had used the extra funds from the tax cut over the past year. The second column in the first table shows that 35.0 percent of individuals actually spent the majority of their tax-cut funds, a sharp increase from the intended use of 8.8 percent. We next compare individuals’ intended use of the tax-cut funds (reported in the early 2011 survey) with what they reported actually doing with the funds. The figure below shows the relative frequency of actual tax-cut-fund use by the three groups based on intended use (that is, mostly consume, mostly save, and mostly pay off debt). For example, of those who planned to spend most of their tax-cut funds, 66.7 percent did in fact spend the majority of it, while 16.7 percent saved the majority of it, and 16.7 percent paid off debt. A similarly high proportion of those who intended to use the majority of their funds to pay off debts did so (60.8 percent), while 46.2 percent of those who planned to save most of their funds actually did so. Two patterns are of note in the chart: (i) while there is a positive correlation between intended and actual uses, there is a high degree of inconsistency; and (ii) there is a systematic shift toward spending for those who did not use their funds in the way they intended, that is, individuals ended up spending more of their tax-cut funds than they had intended.
We can also go beyond grouping respondents by how they used the majority of their funds. In particular, we can directly estimate the marginal propensity to consume (MPC) by taking the average of the proportion of each person’s tax-cut funds that was reported to be used on spending. This, of course, can also be done for saving and paying off debt. This value is far more useful for policymakers when considering how the total tax cut will be used by households. The chart below summarizes the average breakdown of tax-cut-fund use for the full sample and by demographic groups. On average, respondents used 40.5 percent of their tax-cut funds on spending (that is, an MPC of 0.405), 24.1 percent on saving, and 35.3 percent on paying off debt. These figures are quite different from the intended average proportions reported in the first survey, in which, on average, respondents intended to use 16.3 percent of their tax-cut funds on spending (intended MPC of 0.163), 34.2 percent on saving, and 49.5 percent on paying off debt. That is, on average, individuals ended up spending a significantly larger part of the tax-cut funds than they had intended. ...
Our estimated MPC of 0.405 is at the higher end of the range of estimates from the literature based on recent tax rebates: in examining the use of the 2008 tax rebates, one study estimates an MPC of 0.33, and another an MPC of about 12 to 30 percent in the first three months from receiving the rebate; similarly, the MPC in the first three months after the 2001 tax rebates has been estimated in the 20 to 40 percent range. One possible explanation for why we observe a higher MPC out of tax-cut funds than out of tax rebates is that tax cuts show up in smaller amounts spread over multiple paychecks, which many people claim not to notice. These smaller, multiple payments may be more easily spent than large, lump-sum tax rebates.
Three of our findings are noteworthy. One, our larger MPC estimates highlight the importance of the design of tax holidays (rebates or cuts) in determining the response of spending to policies. Second, our finding—that people who perceive tax cuts to be more permanent plan to spend more of their funds—has fiscal policy implications as to whether such tax cuts are implemented as long-term extensions or sequential short-term extensions. Third, we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis—and may also suggest that our estimated MPC is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments.
Posted by Mark Thoma on Wednesday, May 9, 2012 at 08:40 AM in Economics, Fiscal Policy, Taxes |
Posted by Mark Thoma on Wednesday, May 9, 2012 at 12:06 AM in Economics, Links |